Price Regulation in the Pharmaceutical Market

Abstract

This dissertation explores the economic impact of price regulation in the pharmaceutical market. The first chapter is methodological in nature. I show that in the presence of unobserved regulatory constraints traditional structural estimation techniques fail to deliver reliable moment restrictions. I then develop a general methodology that can be used for estimation in models where regulation generates unobserved restrictions on firms’ strategies. The second chapter (co-authored with Fabio Pammolli) uses this novel methodology to calculate the impact of External Reference Pricing (ERP) on launch delays of new drugs in the European pharmaceutical market. Governments that implement ERP use prices in other countries as negotiation benchmarks in an effort to bring down the cost of prescription drugs. By doing so, they limit the ability of firms to price discriminate across countries, and create an incentive to withhold drugs from countries with lower willingness to pay. We find that removing ERP would reduce delays in Eastern Europe by up to 14 months per drug. The third chapter (co-authored with Josh Feng), analyzes the impact of value-based pricing (VBP) on overall welfare in the pharmaceutical market. Advocates of VBP promote it as a potential solution to concerns that drug prices are increasingly misaligned with their therapeutic benefits. We find that even though VBP can help realign R&D incentives, it does not maximize welfare for a wide range of economic models. Moreover, implementing VBP requires accurate measures of value. Using a set of disease-modifying treatments for multiple sclerosis we show that different data and methodologies yield measures of drug value that are only weakly correlated, suggesting that precisely estimating drug value may be a challenging proposition.